FIGHTING CORRUPTION IN THE PUBLIC SECTOR CONTRIBUTIONS TO ECONOMIC ANALYSIS 284 Honorary Editors: D. W. JORGENSON J. TINBERGENy Editors: B. BALTAGI E. SADKA D. WILDASIN Amsterdam Boston Heidelberg London New York Oxford Paris San Diego San Francisco Singapore Sydney Tokyo FIGHTING CORRUPTION IN THE PUBLIC SECTOR Jorge Martinez-Vazquez Javier Arze del Granado Jameson Boex International Studies Program, Andrew Young School of Policy Studies, Georgia State University, Atlanta, GA, USA Amsterdam Boston Heidelberg London New York Oxford Paris San Diego San Francisco Singapore Sydney Tokyo Elsevier Radarweg 29, PO Box 211, 1000 AE Amsterdam, The Netherlands Linacre House, Jordan Hill, Oxford OX2 8DP, UK First edition 2007 Copyright r 2007 Elsevier B.V. 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Because of rapid advances in the medical sciences, in particular, independent verification of diagnoses and drug dosages should be made Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-0-444-52974-9 ISSN: 0573-8555 For information on all Elsevier publications visit our website at books.elsevier.com Printed and bound in The Netherlands 07 08 09 10 11 10 9 8 7 6 5 4 3 2 1 Introduction to the Series This series consists of a number of hitherto unpublished studies, which are introduced by the editors in the belief that they represent fresh contribu- tions to economic science. The term ‘economic analysis’ as used in the title of the series has been adopted because it covers both the activities of the theoretical economist and the research worker. Although the analytical method used by the various contributors are not the same, they are nevertheless conditioned by the common origin of their studies, namely theoretical problems encountered in practical re- search. Since for this reason, business cycle research and national accounting, research work on behalf of economic policy, and problems of planning are the main sources of the subjects dealt with, they necessarily determine the manner of approach adopted by the authors. Their methods tend to be ‘practical’ in the sense of not being too far remote from application to actual economic conditions. In addition, they are quantitative. It is the hope of the editors that the publication of these studies will help to stimulate the exchange of scientific information and to reinforce inter- national cooperation in the field of economics. The Editors This page intentionally left blank Contents Introduction to the Series v Preface ix List of Figures xi List of Boxes xiii List of Tables xv CHAPTER 1 Corruption, Fiscal Policy, and Fiscal Management 1 CHAPTER 2 The Economics of Corruption 11 CHAPTER 3 Regional Patterns of Corruption Around the World 43 CHAPTER 4 Fiscal Dimensions of Corruption 75 CHAPTER 5 Fiscal Response to Reduce Corruption 111 CHAPTER 6 A Case Study in Corruption and Anticorruption Responses 197 CHAPTER 7 Summary, Policy Lessons, and Practical Guidelines 215 References 231 Subject Index 251 This page intentionally left blank Preface Corruption in government, where public officials use their offices for pri- vate gain, has a significant negative impact in countries all over the world. In fact, very few governance issues have more of a negative impact than does corruption. This book addresses the problem of how to fight cor- ruption in the public sector. The study presents a comprehensive analysis of corruption that highlights not only the problems, but also potential solutions for a broad range of corruption manifestations in tax adminis- tration, government expenditure programs, and other areas of fiscal policy and management. The analysis and discussion is supported and clarified by relevant real-world examples and empirical analysis. In particular, coun- try-specific examples are used to identify key issues and valuable lessons for reducing corruption. We have benefited from financial support from the US Agency for International Development for prior work under contract to Development Alternatives, Inc. and Georgia State University that was important in producing this current study. We also would like to thank Mark Gallagher and several reviewers for helpful comments and Attasit Pankaew, Riatu Qibthiyyah, and Juan Luis Gomez for helping us to get this volume ready for publication. Jorge Martinez-Vazquez Javier Arze del Granado Jameson Boex Atlanta, October 2006 This page intentionally left blank List of Figures Chapter 1 Figure 1.1 Patterns of corruption around the world, based in Transparency International Corruption Perception Index (2003) 7 Chapter 2 Figure 2.1 Socially optimum amount of corruption 25 Figure 2.2 Corruption as a tax on production 38 Chapter 3 Figure 3.1 Corruption average scores by geographic region 44 Figure 3.A.1 Scatter plot political vs. administrative corruption around the world 67 Figure 3.A.2 Average administrative and political corruption by geographic region 68 Figure 3.A.3 Administrative and political corruption: sub- Saharan Africa 69 Figure 3.A.4 Political and administrative corruption: Latin America and Caribbean 70 Figure 3.A.5 Political and administrative corruption: West Europe 71 Figure 3.A.6 Political and administrative corruption: East Europe and Central Asia 72 Figure 3.A.7 Political and administrative corruption: South Asia 73 Figure 3.A.8 Political and administrative corruption: East Asia and Pacific 73 Figure 3.A.9 Political and administrative corruption: Middle East and North Africa 74 Figure 3.A.10 Political and administrative corruption: North America 74 xii List of Figures Chapter 4 Figure 4.1 Relationship between tax revenue collection and corruption level 77 Chapter 5 Figure 5.1 Monitoring and evaluation of corruption 186 List of Boxes Chapter 1 Box 1.1 Fighting corruption: the role of International Finance Institutions, bilateral and multilateral donor organizations, and NGOs 8 Chapter 4 Box 4.1 Indirect effects of corruption on revenue collections 79 Box 4.2 The impact of culture on corrupt practices 82 Box 4.3 Corruption in public procurement 98 Box 4.4 Rent and rent seeking 104 Chapter 5 Box 5.1 Political will without an institutional framework: the case of Georgia 115 Box 5.2 Death sentence upheld in state embezzlement cases in Vietnam and China 119 Box 5.3 Anticorruption efforts in Ghana: bonus schemes for tax officials 121 Box 5.4 Tax administration reform client service in South Korean tax administration 125 Box 5.5 Curbing corruption in Peru’s tax administration: the case of semi-autonomous revenue agencies 128 Box 5.6 Revenue authority with ‘limited autonomy’ in Uganda 134 Box 5.7 The large taxpayers monitoring system in the Bureau of Internal Revenues of the Republic of the Philippines 135 Box 5.8 Support to parliamentarian development 142 Box 5.9 Extradition and political corruption: Argentina’s request of extradition for former President Carlos Menem 145 Box 5.10 The separation of functions in budget execution 148 xiv List of Boxes Box 5.11 E-procurement in Mexico and South Korea: enhancing transparency 156 Box 5.12 Transparency International: a selection of the year’s legislation on political party governance, funding, and disclosure 161 Box 5.13 Corruption and anticorruption responses in Bosnia and Herzegovina 163 Box 5.14 Strengthening and broadening the roles of Bulgaria’s Supreme Audit Institution 166 Box 5.15 Parliament fiscal analysis unit in the Kyrgyz Republic 168 Box 5.16 Local corruption in Bangladesh? 174 Box 5.17 Decentralization promotes citizen’s voice in Bolivia 178 Box 5.18 Independent commission against corruption in Hong Kong 183 Box 5.19 Bangalore: report card on public services 184 Chapter 6 Box 6.1 Corruption in Tanzania: trends and comparisons 199 Box 6.2 Petty corruption in Tanzania 200 Box 6.3 Public expenditure tracking in Tanzania 209 List of Tables Chapter 2 Table 2.1 Transparency International’s Corruption Perception Index: perceived corruption in selected countries (2003) 19 Table 2.2 Kaufmann’s Corruption Control Index: perceived corruption in selected countries (2002) 32 Table 2.3 Sources of Transparency International Corruption Perception Index (2003) and Kaufmann et al. (2003) control of corruption 33 Table 2.4 Costs of corruption to the private sector 39 Table 2.5 Economic impacts of increasing corruption by one unit 41 Chapter 3 Table 3.1 Corruption control: sub-Saharan countries (1998 and 2005) 48 Table 3.2 Corruption control: Latin America and Caribbean (1998 and 2005) 51 Table 3.3 Corruption control: Western European Countries